Consider the Source

Acquisition Fever Continues with Xerox’s Purchase of ACS

By Mark Mayo, Partner & President, Global Resources Management, TPI

Acquisition fever has turned up the temperature yet again in the sourcing marketplace.

By now you’ve probably heard that Xerox will acquire ACS during the first quarter of 2010 in a cash and stock transaction valued at US$6.4 billion. Aside from the numbers, what does today’s news mean for the global sourcing industry?

As discussed on this blog twice just last week, the market has seen significant acquisition activity over the past 18 months. Today’s Xerox/ACS news continues the ongoing industry consolidation of service providers with ― again ― a (mostly) large products company buying a services company. Witness last week’s announcement of Dell’s acquisition of Perot Systems and the final phase-out of the EDS brand after having been acquired by HP last year.

Why is this happening? From the acquirer perspective (HP, Dell and Xerox):

• Under significant revenue and margin pressure, all need to diversify their revenue and offering mixes
• They see potential opportunities to cross sell to the new set of clients
• They perceive synergies in the mix of combined solutions

On the flip side, the acquired company has the added benefit of increased access to capital for product and service offering investment, as well as increased ease of financing capital investments related to individual client engagements.

There is always a rub, though. Several challenges that accompany these deals and present significant hurdles to realizing the benefits of acquisition are:

• Integrating the two cultures
• Cross selling services to each other’s clients
• Managing the pressure to sell the parent company’s products

Notably, “vendor independence” has long been a hallmark of the services market. While this has morphed over time as service providers have migrated toward preferred hardware and software platforms in order to reduce initial investments and ongoing maintenance costs, it still remains a significant factor in the marketplace. Balancing the fine line between providing only the parent company’s products versus the offerings that the market or individual client is demanding will be a significant hurdle to all of the companies discussed here. The degree to which these companies are able to mitigate these challenges will have a substantial impact of their success in the market with their combined entities. 

What other benefits and challenges do you see with the continued trend of hardware providers buying services providers? Who do you think will get the fever next?

 

 

Dell’s Acquisition of Perot Systems: Big News for Services Sector

By: Mark Mayo, Partner & President, Global Resources Management, TPI

The big business news of the day came in our own backyard: The $3.9 billion acquisition of Perot Systems by Dell. For Perot, the benefits are increased global reach, access to capital, cross-selling opportunities with Dell’s client base, and of course the obvious: the $30-per-share purchase price valued the company at a 68% premium. For Dell, it will help it diversify its hardware-heavy revenue stream at a time of slowing computer sales.

But for the market as a whole, this is not a game-changer. Dell and Perot had a combined $16 billion in enterprise hardware and IT services over the last four quarters, a far cry from rivals such as HP-EDS and IBM.

What does this mean for clients? The biggest challenge to watch will be integration. During a conference call today, the two companies stressed how much they have in common, particularly a focus on relationships, and noted that they have partnered on selling services for the past two years. But mergers

between product companies and professional services firms have historically been very tricky to pull off, and Dell hasn’t made many acquisitions during its history. To that end, we were pleased to see that Perot CEO Peter Altabef will remain at the helm, reporting directly to Dell founder, chairman and CEO Michael Dell, and the top Perot management team has pledged to stick around, too. Their job will be to retain the necessary components of a service company’s culture, far different from that of a product company. 

We at TPI have great respect for Altabef, as well as for Dell services head Steve Schuckenbrock. The latter’s hiring in 2006 was a sure sign that the PC giant was dead serious about the services business. Still, most of the services work it has done over the years has been closely linked to its products, especially end-user computing. Whether Dell can capitalize on Perot’s client base and strength in health-care and government, two areas poised for growth in the current political climate, remains to be seen.

What’s not in doubt is the future of consolidation in this industry. Outsourcing is only getting more competitive and there’s still more rationalizing to do. But for today, the headlines belong to a couple of titans from Texas. This will be a deal to keep your eye on.